Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Notices 16839 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 55236 

(February 2, 2007), 72 FR 6633. 

4 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. 15 U.S.C. 78c(f). 

5 15 U.S.C. 78f(b)(5). 

6The Exchange confirmed that, in addition to 

orders solicited pursuant to paragraph (e) of ISE 

Rule 716, the last sentence of Supplement .05 to ISE 

Rule 716 also applies to orders solicited pursuant 

to paragraph (d) of ISE Rule 716. Telephone 

conversation on March 28, 2007 between Joseph 

Ferraro, Associate General Counsel, ISE and 

Jennifer Dodd, Special Counsel, Division of Market 

Regulation, Commission. 

7 15 U.S.C. 78s(b)(2). 

8 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 In Partial Amendment No. 2 (‘‘Amendment No. 

2’’), the Exchange clarified the application of 

proposed amendments to NYSE Rule 326 to make 

explicit the ability of the Exchange to restrict the 

growth or business of a member organization, 

respectively, when its tentative net capital declines 

below the early warning notification amount 

required by the Exchange Act Rule 15c3–1(a)(7)(ii). 

4Exchange Act Release No. 54255 (July 31, 2006), 

71 FR 45086 (August 8, 2006). 

5See letter from Thomas Petrone, Managing 

Director, Citigroup Global Markets, Inc. to Nancy M. 

Morris, Secretary, Commission, dated September 

13, 2006. 

6See Partial Amendment No. 3 dated February 1, 

2007 (‘‘ Amendment No. 3’’). Amendment No. 3 

proposed amended language to Rules 325 and 326 

to add an early warning notification more restrictive 

than Commission/CFTC requirements. The text of 

Amendment No. 3 is available at the NYSE, the 

Commission’s Public Reference Room, and http:// 

www.nyse.com. 

7 7 U.S.C. 1 et seq. 

8The CFTC rules became effective on September 

30, 2004. See 69 FR 49784 (Aug. 12, 2004). The 

Commission also recently proposed amendments to 

Exchange Act Rule 15c3–1 and Rule 17a–11 to 

conform provisions of its net capital rule to the 

CTFC amendments. See Exchange Act Release No. 

54575 (October 5, 2006), 71 FR 60636 (October 13, 

2006). 

9 17 CFR 240.15c3–1. 

10Exchange Act Release No. 49830 (June 8, 2004), 

69 FR 34425 (June 21, 2004). 

(‘‘Act’’),1 and Rule 19b-4 thereunder,2 to 

amend ISE Rule 716(d) to allow an 

Electronic Access Member (‘‘EAM’’) to 

execute a transaction through the 

Exchange’s Facilitation Mechanism 

wherein the EAM has solicited interest 

from other parties to execute against a 

block-sized order it represents as agent, 

in addition to facilitating such orders 

with orders from the EAM’s proprietary 

account. The proposed rule change was 

published for comment in the Federal 

Register on February 12, 2007.3 The 

Commission received no comments on 

the proposal. This order approves the 

proposed rule change. 

The Commission finds that the 

proposed rule change is consistent with 

the requirements of the Act and the 

rules and regulations thereunder 

applicable to a national securities 

exchange 4 and, in particular, the 

requirements of Section 6(b)(5) of the 

Act.5 Specifically, the Commission 

believes that the proposed rule change 

is consistent with the Act because it is 

a reasonable modification designed to 

provide additional flexibility for the 

Exchange’s members to obtain blocksized executions on behalf of their 

customers. The Commission notes that 

Supplementary Material .01 to ISE Rule 

716 provides that the use of the 

Facilitation Mechanism does not alter a 

member’s best execution duty to obtain 

the best price for its customer. The 

Commission also notes that 

Supplementary Material .05 to ISE Rule 

716 requires that any solicited contra 

orders entered by Exchange members to 

trade against agency orders may not be 

for the account of an ISE market maker 

that is assigned to the options class.6

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,7 that the 

proposed rule change (SR–ISE–2006–78) 

be, and hereby is approved. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.8

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–6377 Filed 4–4–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55559; File No. SR–NYSE–

2005–03] 

Self-Regulatory Organizations; New 

York Stock Exchange LLC; Notice of 

Filing of Amendment No. 3 to and 

Order Granting Accelerated Approval 

of Proposed Rule Change, as 

Amended Related to Exchange Rule 

325 (Capital Requirements for Member 

Organizations) and Rule 326 (Growth 

Capital Requirement, Business 

Reduction Capital Requirement, 

Unsecured Loans and Advances) 

March 29, 2007. 

I. Introduction 

On January 5, 2005, the New York 

Stock Exchange LLC (‘‘NYSE’’ or the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

the ‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (the ‘‘Exchange Act’’),1 and Rule 

19b–4 thereunder,2 the proposed rule 

change relating to Exchange Rules 325 

and 326. The NYSE filed Amendment 

No. 1 to the proposed rule change on 

February 13, 2006. The NYSE filed 

Amendment No. 2 to the proposed rule 

change on March 17, 2006.3 The 

proposed rule change was published in 

the Federal Register on August 8, 2006.4

The Commission received one comment 

on the proposal.5 On February 1, 2007, 

the Exchange filed Amendment No. 3 to 

the proposed rule change.6

This order provides notice of 

Amendment No. 3 to the proposed rule 

change and approves the proposed rule 

change as amended on an accelerated 

basis. 

II. Description of the Proposal 

The proposed rule change consists of 

amendments to Rule 325 and Rule 326 

to reflect Commission amendments 

under the Exchange Act, including 

amendments to Exchange Act Rule 

15c3–1 that established an alternative 

method of computing net capital for 

broker-dealers, and to reflect 

amendments to Commodity Futures 

Trading Commission rules (‘‘CFTC’’) 

under the Commodities Exchange Act 7

with respect to minimum net capital 

requirements for futures commission 

merchants.8

The Commission’s net capital rule, 

Exchange Act Rule 15c3–1, imposes 

minimum financial requirements on 

broker-dealers.9 To help insure that 

broker-dealers maintain sufficient liquid 

assets to satisfy promptly the claims of 

customers and cover potential market 

and credit risks, the net capital rule 

requires broker-dealers to maintain 

different minimum levels of capital 

based upon the nature of their business 

and whether they handle customer 

funds or securities. 

On June 8, 2004, the Commission 

adopted rule amendments under the 

Exchange Act, including amendments to 

Exchange Act Rule 15c3–1, that 

established a voluntary, alternative 

method of computing net capital for 

certain large broker-dealers that are part 

of consolidated supervised groups 

referred to as consolidated supervised 

entities (‘‘CSEs’’).10 Under the 

Commission amendments, a brokerdealer may use this alternative method 

only if its ultimate holding company 

agrees to compute group-wide allowable 

capital and allowances for market, 

credit, and operational risk in 

accordance with the standards adopted 

by the Basel Committee on Banking 

Supervision, and consents to groupwide Commission supervision. The 

alternative method of computing net 

capital permits a broker-dealer to use 


jlentini on PROD1PC65 with NOTICES
16840 Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Notices 

11The ‘‘haircut’’ approach to computing net 

capital involves reducing the value of firms’

proprietary securities by pre-determined 

percentages to allow for potential reductions in 

market value. See paragraph (c)(2)(vi) of Rule 15c3–

1. 

12See supra note 8. 

13 17 CFR 1.17. 

14See supra note 8; see also 17 CFR 1.17. 

15 17 CFR 240.17a–11. 

16 17 CFR 1.12. 

17 ‘‘Tentative net capital’’ is defined in the CSE 

rules as net capital before deductions for market 

and credit risk. See Exchange Act Rule 15c3–

1(c)(15). 

models, such as ‘‘value-at-risk’’ (‘‘VAR’’) 

models and scenario analysis, which are 

already part of its internal risk 

management control system to calculate 

the market risk and derivatives-related 

credit risk components of its net capital 

requirement. The deduction for market 

risk calculated using internal models 

replaces the traditional ‘‘haircut’’

approach to calculating net capital.11

In 2004, the CFTC amended Rule 1.17 

and adopted certain new ‘‘risked-based’’

capital requirements applicable to 

futures commission merchants.12 CFTC 

Rule 1.17, as amended, requires a 

futures commission merchant to 

maintain adjusted net capital equal to a 

specific percentage of the margin 

required to be collected under exchange 

or clearing organization rules for 

positions carried in customer and 

noncustomer accounts.13

When NYSE member firms allow their 

net capital to decline below certain 

levels, the firms risk non-compliance 

with the requirements of Exchange Act 

Rule 15c3–1. NYSE Rules 325 and 326 

are designed to alert the Exchange 

before such problems occur, and to 

enable the Exchange to prevent 

membership non-compliance by 

restricting the business activities of any 

member organization whose net capital 

falls below certain defined levels. 

Proposed Amendment to NYSE Rule 

325 

Rule 325, the Exchange’s primary net 

capital rule, requires NYSE member 

firms to comply with Exchange Act Rule 

15c3–1 and imposes additional 

requirements to ensure such 

compliance. Rule 325(b) requires a 

member organization to notify the 

Exchange if its net capital falls below 

certain percentages. The proposed 

amendments to Rule 325(b)(1) reflect 

recent changes to the CFTC rules with 

respect to risk-based capital 

requirements for futures commission 

merchants. The proposed amendments 

conform Rule 325 to these CFTC rule 

changes.14

In addition, the proposed 

amendments also add Rule 325(b)(3), 

which would require a member 

organization to provide concurrently to 

the Exchange a copy of any report or 

notification made to the Commission 

pursuant to Exchange Act Rule 17a–

11 15 or CFTC Rule 1.12.16 The NYSE 

stated that this new requirement is 

necessary to help ensure that the 

Exchange continues to receive timely 

notification of potential violations of 

Exchange Act Rule 15c3–1, including 

the rule’s CSE provisions. Therefore, 

because CFTC Rule 1.12 requires 

notification by any futures commission 

merchant that experiences a decline in 

net capital below the CFTC’s early 

warning levels, the Exchange will 

continue to receive notification if a 

member organization acting as futures 

commission merchant is in danger of 

violating CFTC minimum capital 

requirements. 

Proposed Amendments to NYSE Rule 

326 

NYSE Rule 326, which enables the 

Exchange to restrict a member 

organization’s business activities if its 

net capital falls below certain defined 

levels, uses a two-step approach to 

preventing membership non-compliance 

with Exchange Act Rule 15c3–1. First, 

Rule 326(a) allows the Exchange to 

prohibit a member organization from 

expanding its business if its net capital 

falls below specified levels. Second, if a 

member organization’s net capital falls 

below lower, specified levels, Rule 

326(b) allows the Exchange to compel it 

to reduce its existing business. To 

enable the Exchange to regulate its 

membership proactively (that is, to act 

if a member or member organization is 

in danger of violating Exchange Act 

Rule 15c3–1, rather than waiting until 

Exchange Act Rule 15c3–1 has been 

violated), the levels specified in NYSE 

Rule 326 are higher than those 

contained in Exchange Act Rule 15c3–

1. 

The proposed amendments would 

add language to provide minimum 

tentative net capital 17 and net capital 

levels for the Exchange to use when 

prohibiting, under Rule 326(a), the 

expansion of business by a member 

organization using the alternative 

method of computing net capital under 

the Commission’s CSE rules. The 

proposed amendments also conform the 

rule language with respect to member 

organizations registered as futures 

commission merchants to the CFTC rule 

amendments regarding risk-based 

capital requirements. 

The NYSE stated that the levels 

proposed in Rule 326(a) for CSE firms 

(50 percent of the tentative net capital 

level that triggers Commission 

notification or a net capital level of less 

than $1.25 billion) would not unduly 

restrict a member organization’s 

business, but would allow the 

Exchange, after evaluating a member 

organization’s financial condition, to 

use the disincentive of restricted 

business expansion to encourage 

necessary corrective action by a member 

organization whose net capital has 

fallen to levels that risk violation of 

Exchange Act Rule 15c3–1. 

The Exchange also proposes to amend 

Rule 326(a) to require a futures 

commission merchant to restrict its 

business activities during any period in 

which its net capital is less than 120 

percent of the minimum risk-based 

capital requirements of CFTC Rule 1.17. 

The Exchange also proposes to amend 

Rule 326(b) to provide minimum 

tentative net capital and net capital 

levels for the Exchange to use in 

requiring a CSE firm to reduce its 

business pursuant to Rule 326(b). The 

Exchange stated that the levels proposed 

in Rule 326 (40 percent of the tentative 

net capital level that triggers 

Commission notification or net capital 

of less than $1 billion) would not 

unduly restrict a member organization’s 

business, but would allow the 

Exchange, after evaluating a member 

organization’s financial condition, to 

use the disincentive of mandatory 

business reduction to encourage 

necessary corrective action by a member 

organization whose net capital has 

fallen to levels that risk violation of 

Exchange Act Rule 15c3–1. 

The proposed rule changes to Rule 

326(b) also would require a member 

organization to reduce its business if its 

net capital falls below 110 percent of the 

minimum capital requirements of CFTC 

Rule 1.17 (the same level that triggers 

notification to the CFTC under CFTC 

Rule 1.12). Therefore, the Exchange will 

retain the ability to compel a member 

organization to reduce its business if its 

net capital falls to levels that may 

violate CFTC minimum capital 

requirements. 

The Exchange also proposed rule 

amendments to Rules 326(c) and (d) to 

reflect the CFTC rule amendments with 

respect to risk-based capital 

requirements for futures commission 

merchants. These proposed rules 

amendments are parallel to the 

proposed changes to Rules 326(a) and 

(b), respectively. 

Finally, the proposed rule 

amendments contain proposed language 

changes to renumber certain paragraphs 

and other non-substantive changes. 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 72, No. 65 / Thursday, April 5, 2007 / Notices 16841 

18See supra note 5. 

19 15 U.S.C. 78f(b)(5). 

20 In approving the proposed rule change, as 

amended, the Commission notes that it has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

21See supra note 4. 

22See supra note 5. 

23The CFTC rules became effective on September 

30, 2004. See 69 FR 49784 (Aug. 12, 2004). 

24 15 U.S.C. 78s(b)(2). 

25 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

III. Summary of Comment Received 

The Commission received one 

comment letter to the proposed rule 

change.18 The commenter supported 

prompt implementation of the proposal 

and commented specifically on the 

proposed changes to NYSE Rule 431(e). 

The NYSE, however, deleted this 

proposed paragraph in Amendment No. 

3, and determined to proceed with the 

proposed rule change addressing 

amendments to NYSE Rules 325 and 

326 only. No specific comments were 

received with respect to the proposed 

amendments to these rules. 

IV. Discussion and Commission 

Findings 

The Commission has carefully 

reviewed the proposed rule change and 

comment letter and finds that the 

proposed rule change is consistent with 

the requirements of Section 6(b)(5) 19 of 

the Exchange Act, which requires that 

the rules of the Exchange be designed to 

promote just and equitable principles of 

trade, to remove impediments to and 

perfect the mechanism of a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest.20

The Commission believes that the 

proposed amendments are consistent 

with the requirements of Section 6(b)(5) 

of the Act in that they align the language 

in Rules 325 and 326 to reflect the 

Commission amendments to Rule 15c3–

1 with regard to the alternative method 

of computing net capital for brokerdealers and they incorporate the CFTC 

rule amendments for NYSE member 

firms registered as futures commission 

merchants. 

NYSE has requested that the 

Commission find good cause for 

approving the proposed rule change 

prior to the thirtieth day after the date 

of publication of notice of Amendment 

No. 3 in the Federal Register. The 

Commission notes that the proposal, as 

modified by Amendment Nos. 1 and 2, 

was published for notice and 

comment,21 and that the Commission 

received one comment letter.22 In 

Amendment No. 3, NYSE made 

proposed changes to NYSE Rules 325 

and 326 to make conforming changes to 

CFTC early warning requirements for 

futures commission merchants and 

determined not to proceed with 

amendments to Rule 431(e).23

Accordingly, the Commission does not 

believe that Amendment No. 3 raises 

any new or novel issues. Based on the 

above, the Commission finds good cause 

to accelerate approval of the proposed 

rule change, as amended. 

V. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as amended, is consistent with 

the Act. Comments may be submitted by 

any of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NYSE–2005–03 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NYSE–2005–03. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filing also will be 

available for inspection and copying at 

the principal office of NYSE. 

VI. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,24 that the 

proposed rule change (SR–NYSE–2005–

03), as amended, be, and hereby is, 

approved on an accelerated basis. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.25

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–6311 Filed 4–4–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55555; File No. SR–NYSE–

2007–09] 

Self-Regulatory Organizations; New 

York Stock Exchange LLC; Notice of 

Filing of Proposed Rule Change as 

Modified by Amendments No. 1 and 2 

Thereto Relating to Rule 18 

(Compensation in Relation to System 

Failure) 

March 29, 2007. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on January 

26, 2007, the New York Stock Exchange 

LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been substantially prepared by the 

Exchange. The Exchange filed 

Amendments No. 1 and 2 to the 

proposal on February 1, 2007, and 

March 28, 2007, respectively. The 

Commission is publishing this notice to 

solicit comment on the proposed rule 

change, as amended, from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is proposing to adopt 

Rule 18, ‘‘Compensation in Relation to 

Exchange System Failure,’’ which will 

provide a form of compensation to 

member organizations when a loss is 

sustained in relation to an Exchange 

system failure. The Exchange further 

proposes to amend Rule 134 

(‘‘Differences and Omissions-Cleared 

Transactions (‘‘QTs’’)’’) to require that 

profits equal to or greater than $5,000 

gained in relation to an Exchange 

system failure be remitted to the 

Exchange to be included in funds 

available for distribution pursuant to 

proposed Rule 18. 

The text of the proposed rule change 

is available on the Exchange’s Web site 

(http://www.nyse.com), at the 


jlentini on PROD1PC65 with NOTICES